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Taking Knife to Medicare Means Someone Must Bleed: BGOV Insight

If Democrats and Republicans ever agree to a “grand bargain” of tax increases and entitlement cuts, get ready for the next debate: Which parts of the country’s $2.8 trillion health-care industry should feel the most pain?

There are four basic ways for lawmakers to make that choice. Whatever approach they take will have a profound impact on the businesses that make up the health-care industry -- hospitals, physicians, drugmakers, nursing homes and others. Some approaches may hurt some sectors more than others; more important, however, is which policy minimizes the pain on the industry as a whole.

One option is simply to cut Medicare and Medicaid proportionately across all health-care sectors. Under this approach, similar to the dreaded “sequestration” currently set to occur in January on defense and domestic discretionary programs, each industry sector would take the same hit, whether it’s 5 percent, 25 percent or some other magic number.

A second option is to pick winners and losers -- paring more from sectors that are the least popular, and somewhat less from those with more pull among voters, donors or lawmakers. The public’s attitudes may have guided the reductions in Obama’s 2013 budget, which proposed $156 billion in cuts to drugmakers over 10 years, three times the cutbacks for hospitals, and it largely spared doctors.

A third option is to let someone else decide -- whether the market, the states, or outside experts. Paul Ryan, House Budget chairman and Mitt Romney’s running mate, proposes transforming Medicare into vouchers, which beneficiaries would use to subsidize the cost of private insurance. Ryan’s proposal would also turn Medicaid into block grants, which states could spend as they like. The value of both the vouchers and the block grants would grow more slowly than under current projections.

Obama’s 2010 health-care law contained a provision with a similar outcome. It created a body, the Independent Payment Advisory Board, to decide on Medicare cuts if spending rises beyond a specified amount starting in 2015. Under vouchers, block grants, and the advisory board, how reductions would be apportioned would largely be out of the hands of Congress or federal agencies.

So the first three options come down to a using blunt instrument, relying on political influence, or passing the buck either to the market, the states or the experts.

Each approach has its own gravitational pull. All ignore a vital part of the debate: the relative financial impact on the business sectors involved. The degree to which different sectors of the health-care industry depend on federal financing varies widely, which means that some sectors would be hurt more than others if the cuts are applied equally.

In 2013, an estimated 83 percent of home health-care spending will come from Medicare and Medicaid, as will 55 percent of spending on nursing care. Meanwhile, doctors will get less than a third of their revenue from the programs next year, and drugmakers only a fraction more. Hospitals fall in the middle of the range, getting half of their funding from the two programs.

That disparity in exposure suggests there ought to be a fourth option for spreading the pain of entitlement austerity: apportioning cuts to Medicare and Medicaid based on the ability of health-care sectors to absorb them. Under this approach, the government would reduce spending more aggressively for sectors least reliant on those programs, such as doctors and pharmaceutical companies, while sparing others the full brunt of the pain.

To be sure, relative exposure isn’t the only thing to consider. Some funding formulas are more generous than others, and those differences should inform any reasonable package of cuts. Meanwhile, it’s naïve to imagine that either party would entirely ignore the political calculus of whom to cut and by how much.

And there’s this to keep in mind: If health-care sectors with little reliance on Medicare or Medicaid are cut too deeply, companies may decide to stop working with the programs altogether -- hurting the patients who rely on those services.

The U.S. health-care industry constitutes 18 percent of the U.S. gross domestic product and employs more than 14 million people. While the government has an obligation to maintain a responsible fiscal policy that doesn’t put the entire economy at risk, it can accomplish that in a way that considers the impact on the industry’s constituent parts.

Some health-care sectors have come to depend on federal spending more than others. Recognizing that fact will help ensure that future cuts will cause the least havoc in the nation’s health-care delivery system.

(Christopher Flavelle is a health-care analyst with Bloomberg Government. The views expressed are his own.)

To contact the analyst: Christopher Flavelle in Washington at cflavelle@bloomberg.net

To contact the editor responsible: David Rapp at drapp5@bloomberg.net

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